GNMA, FNMA Seize Assets from Reverse Mortgage Funding Estate

December 22, 2022 | Premium Service | Earlier this week, the Government National Mortgage Association (GNMA) and Federal National Mortgage Association (FNMA) exercised their legal authority to seize government-insured reverse mortgages from the estate of Reverse Mortgage Funding (RMF), a lender that filed bankruptcy November 30th. The US government now owns the largest reverse lender in the country. We previously reported on this event of default for subscribers to our Premium Service (“RMF Bankruptcy Signals Systemic Risk in GNMA Market”).

These involuntary transfers and extinguishment of servicing rights by GNMA and FNMA make RMF the most significant event of default in the government loan market since the collapse of Taylor, Bean & Whitaker in 2011. This busted auction and asset seizure of home equity conversion mortgage (HECM) loans involves banks and non-banks, and may be a precursor of larger disruptions in the credit markets. But the Federal Open Market Committee ultimately must take the blame for this widening mess.

The unraveling of the liquidity in the reverse space began with non-agency products, which lost liquidity first and foremost as the Fed raised interest rates hundreds of basis points, widened spreads and boosted volatility 2x. This added to pressure on the liquidity of RMF and the industry as a whole. Mortgage banks face an already difficult market environment due to low origination volumes and increasingly selective buyers of mortgage paper like HECM tails.

“The transfer of servicing for RMF loans should have minimal direct impact on affected borrowers," Ginnie Mae President Alanna McCargo said in a statement. "Borrowers will receive a notification about the transfer of servicing as required by law, but that will not affect the payment schedule and borrowers should expect to continue to receive payments as usual.”

Last weekend, a group of parties apparently was attempting to pull together funding to recapitalize the RMF business and, more important, fund the buyout of some $90 million in HECMs that had reached maturity in GNMA pools. In addition, the ostensive buyers of RMF needed to fund hundreds of millions in existing advances to reverse mortgage borrowers.

Another problem several investors cite was that junior tranche buyers had backed away from the market for HECM tail interests, making the buyout task even more problematic without a take-out for the tails and the notes. In November, RMF had only been able to finance its buyout obligations via an emergency financing provided by affiliates and existing MSR lenders Nomura (NMR) and Leadenhall Capital. A partial list of parties is shown below:

When it became apparent that RMF could not meet its future obligations, this led to the bankruptcy filing at the end of November. Since the filing, a variety of existing parties and new entrants attempted to negotiate an arrangement to fund the business and particularly fund buyouts of mortgages in December and going forward. These efforts were unsuccessful.

In addition, once RMF notified its customers about the bankruptcy filing, clients immediately drew the maximum amount of cash advances on the HECMs. GNMA and the US Treasury now own these notes and are on the hook for hundreds of millions in expenses to cover the cash-flow needs for RMF. Over the next six months, the RMF portfolio could cost the US Treasury hundreds of millions.

When efforts failed over the past weekend, the secured parties including GNMA and FNMA moved to seize the assets from the bankruptcy estate and finance the buyouts from the pools. This process surfaced Wednesday in the filings with the Bankruptcy Court, when FNMA formally asked the Court to lift the automatic stay for the purpose of transferring assets and terminating a lending relationship. GNMA is already exempt from the automatic stay by statute and did not seek Court permission.

The event of default by RMF highlights some of the more glaring structural deficiencies in the federal market for reverse mortgages. In basic terms, reverses are a difficult product in a stable rate environment, but the recent moves by the FOMC to raise rate have rendered the situation impossible. Legislation is needed to provide government liquidity support for the government loan market. Duh.

In terms of immediate fallout, the two secured lenders, Texas Capital Bank (TBCI) and Credit Suisse (CS) could face significant losses as a result of the involuntary transfer of the HECM and other assets. When a transfer occurs, the "secured" lender typically then is left with an unsecured claim on the bankruptcy estate but the loan and attached servicing asset is gone.

TCBI is the leader in the space and, according to the web site, provides “credit facilities to support HECM lenders, offering lines for both HECM Tail Financing and HECM Ancillary Financing.” Other than the Liberty unit of Ocwen Financial (OCN), TCBI reportedly has most of the warehouse and buyout exposure in the reverse sector. Significantly, OCN does not deal in non-agency reverse mortgage products and is arguably the strongest issuer in the reverse market today.

Another big unanswered question is what becomes of the US business of Credit Suisse. Since the bank announced a transaction with Apollo Global Management (APO), there have been continued questions about the role of other firms in the investment and particularly the disposition of the GNMA exposures of CS. More broadly, the exodus of bankers from CS over the past six months raises big question about what Wall Street bank is willing to play the role of facilitator to to the financing market for government loans and MSRs.

The trouble with all government loans, forwards or reverses, is that you as a lender never have a clear collateral lien on the asset. Since the creditor cannot bifurcate the FHA-insured loan from the arguably private servicing asset, and since HUD and GNMA have an unassailable statutory position as creditors, lenders essentially hold an unsecured asset. Indeed, all of the financing transactions for MSRs are structured as “participations” and explicitly state that the issuer is the primary credit.

The big question raised by this event of default is the state of the market for government assets going forward. Several investors told The IRA that RMF was not able to float a financing of HECM tail pieces, US guaranteed paper that is routinely marketed in private transactions. If issuers cannot liquefy these government obligations in due course, then the whole government mortgage space is in jeopardy.

But the bigger threat to the mortgage industry is that policy makers will see the failure of RMF and the action by GNMA as an indictment of nonbank mortgage firms instead of a call to action for legislation to fix the glaring deficiencies in the government loan program. The idea that either a bank or nonbank can provide funding to the FHA market when the Fed is moving interest rates hundreds of basis points in less than a year is absurd. The US government needs to provide liquidity support to the government loan market! Duh.

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